Vodafone deals binge heightens debt risk

LONDON — Debt anxieties are stalking Vodafone as the communications group sets about constructing a European fixed-line network after the $130bn sale of its Verizon Wireless stake.

Vodafone wants to be an integrated operator, offering mobile and fixed-line communication services across its core markets.

To do this, Europe’s largest telecommunications provider is buying fixed-line assets from the UK to Germany and Spain.

Its most recent deal was the €7.2bn purchase of Spanish cable operator Grupo Corporativo Ono in March. Moody’s Investors’ Service said this week Vodafone could lose its A3 rating — the fourth-lowest investment grade — in the absence of action to cut leverage. Standard & Poor’s and Fitch Ratings, which also rank Vodafone four levels from junk, issued similar warnings in March.

"When Vodafone first planned the sale of their US business, they wouldn’t have expected their operations to be declining at this sort of rate and to be doing so much M&A (mergers and acquisition) this quickly," said CreditSights analyst Mark Chapman.

"They wouldn’t have thought they’d need the cash as much as they do now."

Vodafone shares fell 1% to 197.25p on Thursday morning. The cost of insuring Vodafone’s debt for five years rose one basis point yesterday to 54, matching the level it started the year.

That compares with a 12 basis point drop in the Markit iTraxx Europe Index of credit-default swaps on 125 investment-grade companies including Vodafone. Deutsche Telekom, which is ranked a level below Vodafone and is also in the index, fell 15 basis points to 51.

Vodafone’s $1.6bn of bonds due in 2023 gave investors about 5.8% this year, compared with a 7.2% gain for dollar-denominated investment-grade bonds sold by communications companies.

In its Ono acquisition, Vodafone agreed to pay 10.5 times annual earnings before interest, taxes, depreciation and amortisation (ebitda).

Last year, it paid 12.4 times ebitda to buy Kabel Deutschland Holding.

In the past two years, the average multiple paid for North American and European cable companies was 9.5 in deals of more than €7bn.

Vodafone, would not comment on Thursday on its ratings, but is still in investment mode, and has indicated more deals are possible.

"I strongly believe that if you find a good acquisition, you first have to be very, very convinced of the synergies," CEO Vittorio Colao said last month. "Then you look at the financing and you do what you need to do."

Vodafone’s total debt was £28.3bn at March 31, according to company accounts. Mr Colao said net debt would be about two times ebitda at the end of its 2014 financial year.

While that compares with an average of 2.11 times ebitda among Stoxx 600 telecommunications operators, ratings companies say the Ono acquisition risks pushing the ratio above thresholds deemed compatible with its existing credit score.

Vodafone still has network gaps to address, in among others Italy and Portugal, where it is likely to struggle to agree on a reasonable price for similar deals.

"Fixed-line assets aren’t freely available to buy, this isn’t a liquid market," said Oriel Securities analyst John Karidis. "In situations where Vodafone feel they need to buy, this weakens their negotiating position," said Mr Karidis.

LONDON — Debt anxieties are stalking Vodafone as the communications group sets about constructing a European fixed-line network after the $130bn sale of its Verizon Wireless stake.

Vodafone wants to be an integrated operator, offering mobile and fixed-line communication services across its core markets.

To do this, Europe’s largest telecommunications provider is buying fixed-line assets from the UK to Germany and Spain.

Its most recent deal was the €7.2bn purchase of Spanish cable operator Grupo Corporativo Ono in March. Moody’s Investors’ Service said this week Vodafone could lose its A3 rating — the fourth-lowest investment grade — in the absence of action to cut leverage. Standard & Poor’s and Fitch Ratings, which also rank Vodafone four levels from junk, issued similar warnings in March.

"When Vodafone first planned the sale of their US business, they wouldn’t have expected their operations to be declining at this sort of rate and to be doing so much M&A (mergers and acquisition) this quickly," said CreditSights analyst Mark Chapman.

"They wouldn’t have thought they’d need the cash as much as they do now."

Vodafone shares fell 1% to 197.25p on Thursday morning. The cost of insuring Vodafone’s debt for five years rose one basis point yesterday to 54, matching the level it started the year.

That compares with a 12 basis point drop in the Markit iTraxx Europe Index of credit-default swaps on 125 investment-grade companies including Vodafone. Deutsche Telekom, which is ranked a level below Vodafone and is also in the index, fell 15 basis points to 51.

Vodafone’s $1.6bn of bonds due in 2023 gave investors about 5.8% this year, compared with a 7.2% gain for dollar-denominated investment-grade bonds sold by communications companies.

In its Ono acquisition, Vodafone agreed to pay 10.5 times annual earnings before interest, taxes, depreciation and amortisation (ebitda).

Last year, it paid 12.4 times ebitda to buy Kabel Deutschland Holding.

In the past two years, the average multiple paid for North American and European cable companies was 9.5 in deals of more than €7bn.

Vodafone, would not comment on Thursday on its ratings, but is still in investment mode, and has indicated more deals are possible.

"I strongly believe that if you find a good acquisition, you first have to be very, very convinced of the synergies," CEO Vittorio Colao said last month. "Then you look at the financing and you do what you need to do."

Vodafone’s total debt was £28.3bn at March 31, according to company accounts. Mr Colao said net debt would be about two times ebitda at the end of its 2014 financial year.

While that compares with an average of 2.11 times ebitda among Stoxx 600 telecommunications operators, ratings companies say the Ono acquisition risks pushing the ratio above thresholds deemed compatible with its existing credit score.

Vodafone still has network gaps to address, in among others Italy and Portugal, where it is likely to struggle to agree on a reasonable price for similar deals.

"Fixed-line assets aren’t freely available to buy, this isn’t a liquid market," said Oriel Securities analyst John Karidis. "In situations where Vodafone feel they need to buy, this weakens their negotiating position," said Mr Karidis.

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